I have just about finished watching the first season of House of Cards, the first original show created by Netflix. It is well-done and quite disturbing.
The character development and dialogue in the show is some of the best I have ever seen. I am also partial to the dialogue by Kevin Spacey’s character, House Majority Whip Frank Underwood, which is used to deliver insight into what he is thinking.
With all this good work, it is also a very disturbing show. It is off-putting to see a society with such high political power act this way. The title of the show even displays an upside-down American flag.
But of course, this is entertainment.
Financial advisors are not in the entertainment industry. They are in the service of providing clear, forthright recommendations to best serve their clients.
After the global financial crisis, most of those in the financial industry had to rebuild client trust. Even today, I still see younger clients questioning the allegiance of financial planners.
To gain trust and collaborate with individuals, financial advisors need to provide a reasonable basis for their views and recommendations, which includes an assessment of investment risks—both financial risks and those related to environmental, social, and governance issues.
In a CFA Institute Conference Proceedings paper, titled The Risks That Security Analysts Face, author Jeremy Bolland discussed that “honest analysts who treat clients fairly and disclose relationships they have with the companies recommended should have little to worry about.”
If financial advisors lose the trust of their clients, the entire business model goes away.
Advisors can use best practices when dealing with clients. Specifically, advisors can do two things: 1. Disclose conflicts of interest and/or why there may be prejudice in your recommendation; and 2. Justify your recommendation with an analysis of the pros and cons as well as probabilities of risk.
Bolland expresses “Above all, analysts should always treat clients fairly and put their clients’ interests ahead of their own.”
This includes disclosing the types of services clients are receiving for their money. There is a recent trend in the industry that advisors should divide clients by type. These types can be by amount of fees, the service that is provided, or some other way to characterize the client. However, the client must know how they are receiving different service and the pricing that accompanies it.
The final part of using best practices is providing clients with a reasonable basis of why you are recommending a product or service to them. You can easily provide the risk scenarios. Most individuals know all too well that we cannot possibly know what will happen in the future, but as advisors, we can provide clients with an understanding of what the risks are and how they may be impacted.
Financial advisors have a great deal of regulatory issues to overcome. There are so many rules that go beyond the focus of this post; however, a financial advisor can maintain best practices by supporting their recommendations and disclosing conflicts of interest to remain true to serving the client first. No need to fold your hand or play by a House of Cards mentality – stay true to your clients, and you’ll win.
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